Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints

62 Pages Posted: 10 Dec 2013 Last revised: 12 May 2023

See all articles by Aloisio Araujo

Aloisio Araujo

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Aloísio P. Araújo

EPGE/FGV and IMPA

Susan Schommer

Instituto Nacional de Matemática Pura e Aplicada (IMPA)

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: December 2013

Abstract

We consider the effects of central-bank purchases of a risky asset, financed by issuing riskless nominal liabilities (reserves), as an additional dimension of policy alongside "conventional" monetary policy (central-bank control of the riskless nominal interest rate), in a general-equilibrium model of asset pricing and risk sharing with endogenous collateral constraints of the kind proposed by Geanakoplos (1997). The existence of collateral constraints allows our model to capture the common view that large enough central-bank purchases would eventually have to affect asset prices. But even when central-bank purchases raise the price of the asset, owing to binding collateral constraints, the effects need not be the ones commonly assumed. We show that under some circumstances, central-bank purchases relax financial constraints, increase aggregate demand, and may even achieve a Pareto improvement; but in other cases, they may tighten financial constraints, reduce aggregate demand, and lower welfare. The latter case is almost certainly the one that arises if central-bank purchases are sufficiently large.

Suggested Citation

Araujo, Aloisio and Araújo, Aloísio P. and Schommer, Susan and Woodford, Michael, Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints (December 2013). NBER Working Paper No. w19711, Available at SSRN: https://ssrn.com/abstract=2366045

Aloisio Araujo (Contact Author)

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Aloísio P. Araújo

EPGE/FGV and IMPA ( email )

Estrada Dona Castorina, 110
Jardim Botanico Caixa Postal 34021
Rio de Janeiro
Brazil
55-21-2529-5140 (Phone)
55-21-2529-5129 (Fax)

Susan Schommer

Instituto Nacional de Matemática Pura e Aplicada (IMPA) ( email )

Estrada Dona Castorina 110
Rio de Janeiro, 22460
Brazil

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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